Empowering women through micro-finance in Madhya Pradesh

In 2005, the International year of Micro-Credit, Kofi Annan (Secretary General of the U.N.) highlighted the importance of micro-finance in helping to “alleviate poverty by generating income, creating jobs, allowing children to go to school, enabling families to obtain health care, and empowering people to make the choices that best serve their needs”. While I was working with Action for Social Advancement (ASA) in Bhopal this year, I was able to get involved with some social research that assessed the feasibility of establishing micro-finance programmes in several villages. Micro-finance has become an important tool to fight poverty that has been widely used in India. This article will look at some of the problems faced by villagers in rural Madhya Pradesh and how micro finance can help to solve them.

Madhya Pradesh is one of India’s largest states and the majority of its population live in rural areas, relying on agriculture for their livelihoods. To fund agricultural inputs required for this living (such as seeds and fertilisers) as well as other credit requirements such as festivals, marriage dowries and illnesses, villagers often find themselves in a position in which they need to obtain a loan.

Sources of credit are often divided into two categories: formal and informal. The main formal credit sources include commercial banks, co-operative banks, regional rural banks and non-banking financial corporations. Formal credit sources are usually characterised by certain procedures and rules that the borrower should follow. Due to this formalisation, they are often found to be extremely bureaucratic in nature. The lack of access to this credit source is a major problem that villagers face; the physical inaccessibility of the village, the deficiency of economic capital to provide collateral and lack of social capital of the villagers all mean that this is often not a viable option. Instead, villagers often have to rely on informal sources of credit.

Money-lenders (either from the village or local town) dominate this sector and are thus villagers’ most important source of credit. Though credit is often provided without the need of collateral, interest rates are often exorbitant (sometimes up to 25% per month) and tend to exploit poor villagers. Due to the nature of this credit source, the poor are often vulnerable and can find themselves trapped in a ‘vicious circle of debt’ with the villager sometimes forced to sell their agricultural produce to the money-lender at below market-rates.

With these problems in mind, how can micro-finance help? At ASA, micro-finance is promoted in the form of Self Help Groups (SHGs). SHGs usually consist of 10-20 people (predominantly female) and work on the principle which substitutes peer-pressure as the new collateral around which the bankers are willing to lend. After these groups are facilitated, women are able to save collectively and are then far more likely to be able to acquire loans from formal sources of credit at much lower rates of interest than the moneylenders.

As SHGs are often predominantly female, they also help to empower women. This broadly works in three ways:

1 - By providing external sources of capital, micro-finance helps to reduce the economic dependency of women on husbands, enhancing their autonomy;

2 - The same independent source of income, together with the exposure to new sets of values, ideas and social support makes the women more assertive of their rights; and

3 - Through micro-finance, the control over material resources raises the women’s prestige and status, often resulting in greater decision-making democracy in the household.

This article has aimed to briefly describe some of the problems relating to access to credit that are faced by the rural poor in India. Micro-finance is one of the tools that can be used to address these problems as well as providing another way to empower women. I was very privileged to witness this first hand and firmly believe that ASA’s work is making a large difference in the lives in many villages across Madhya Pradesh.

Tom Salisbury